Board of Governors of the Federal Reserve System

October 2012

Do Rising Top Income Shares Affect the Incomes or Earnings of Low and Middle-Income Families?

Jeffrey P. Thompson and Elias Leight

Abstract:

This paper uses US state panel data to explore the relationship between the share of income received by affluent households and the level of income and earnings received by low and middle-income families. A rising top share of income can potentially lead to increases in the incomes of low and middle-income families if economic growth is sufficiently responsive to increases in inequality. A substantial literature on the impacts of inequality on economic growth exists, but has failed to achieve consensus, with various studies finding positive impacts, negative impacts, and no impacts on growth from increased levels of income inequality. This paper departs from that literature by exploring the effect of inequality on the standard of living of middle-income and low-income families. In the context of rising inequality, increased overall growth is not necessarily a suitable proxy for overall standard of living, since growth patterns are not always uniform for the entire income distribution. The results of this study indicate that increases in the top share of income (particularly the top one percent) are associated with declines in the actual incomes (and earnings) of middle income families, but have no clear impact on families at the bottom of the income distribution.

Keywords: Inequality, growth, income distribution, standard of living

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